Taiwan Dollar Zips From Boring Bet to Hot Money Trade

Asian currency strength is causing consternation for institutional investors and central bankers alike. There’s been a record surge in strength for the Taiwan dollar, while Hong Kong’s central bank equivalent is furiously defending the Hong Kong dollar’s peg to its U.S. counterpart.

U.S. dollar weakness and concern over tariffs is ultimately driving the unusual moves. But the fluctuations cause problems for exporters that make their profits or price their goods in other currencies, as well as any trading houses or manufacturers that rely on parts or commodities from abroad.

I can’t say I have ever in my 24 years in Asia written a story focused on the New Taiwan dollar, but that’s what I find myself doing today. The currency is normally carefully managed by the central bank, meaning it isn’t that volatile. The New Taiwan dollar, which replaced the “old” Taiwan dollar in 1949, is normally a non-story.

Taiwan dollar falls off precipice

That is far from the case this week. The chart looks a little crazy as the New Taiwan dollar surges from NT$33.26 at the start of April to NT$32.04 at the start of May, then drops off a cliff.

Yesterday it was changing hands at NT$28.87, easing slightly to NT$30.17 as I write. Still, there’s never been a week when it has moved so suddenly, a change of 10.1% from peak to trough in May.

The Taiwan dollar has been getting stronger ever since the sudden escalation in tariffs announced by U.S. Pres. Donald Trump on the Rose Garden lawn on April 3. Taiwan, the hotbed of global semiconductor manufacturing, is threatened with an added U.S. import tax of 32%, although that’s been suspended for 90 days.

Still, there’s an extra 10% trade tax on all U.S. imports in place, no matter the source. And we’re going to revisit all the uncertainty as we approach the end of the 90-day suspension on July 8.

Diplomatic language on trade

The Taiwan government said on Saturday that its trade team had completed the first round of tariff talks with their U.S. counterparts. The Taiwanese side called the talks “substantive,” but it was really diplomat speak, throwing in terms like “frank” and “cordial” to describe the atmosphere for good measure.

Those are the kind of words you use when you kicked things off, but didn’t really get anywhere in terms of specifics. The Taiwan statement said both sides agreed to “continue consultations on various issues in the near future,” with a view to strengthening the U.S.-Taiwan “mutually beneficial relationship.”

Currency traders appear to be betting that U.S. negotiators will want to see major export partners cease “currency manipulation,” and allow currencies like the Taiwan dollar to appreciate. U.S. exports get cheaper and more attractive if foreign currencies gain ground, and it’s also a quick way to address an imbalance of trade.

Trump would also like to see the U.S. Federal Reserve cut interest rates, which would further undermine the greenback.

Hefty U.S. holdings

It’s an upheaval of the status quo, which has seen the U.S. dollar strengthen as both a safe haven and as U.S. assets appreciated on the back of the “U.S. exceptionalism” trade. Now we are seeing questions about the strength of the U.S. equity market, U.S. economy and U.S. currency, all of them weakening this year.

In export-dominated economies such as Taiwan, institutions such as insurers have built up massive positions in U.S. dollar assets, typically treasuries. The rapid change in the Taiwan dollar suggests there’s a sudden, large-scale adjustment to those holdings. Taiwan’s manufacturers – worried their overseas receipts are depreciating – are having to hedge their currency exposure, at the same time that Taiwan’s large insurers are also having to buy Taiwan dollars.

It’s estimated Taiwanese life insurers hold $1.7 trillion in U.S. assets, mainly in treasuries, and the bulk of it previously unhedged. As they cover what’s rapidly becoming a liability, they’re forced into a crowded trade in a relatively thin market. Global fund managers may also have borrowed in Taiwan, where the interest rate is a low 2.0%, giving them leveraged positions they have to rapidly adjust.

Unhedged Asian assets attractive

The currency change does make unhedged positions in Taiwan equities more attractive. You’ve effectively got a 10% free ride as a U.S. investor holding Taiwan stocks.

The Taiwan office of trade negotiations insists that currencies and exchange rates have not come up in the trade discussions. Frankly, I believe that, since such nitty gritty details are likely beyond the U.S. negotiators, attempting as they are to strike some 100 trade deals with separate nations, at once.

The White House says negotiations with India are some of the most-advanced, with Japan and South Korea also in the first tranche of negotiations. You’d expect Taiwan, as a key U.S. ally and also leading producer of the semiconductor chips that are vital to so many industries, to be part of the first wave, too.

The hasty pace suggests the deals will be as precise and effective as the Rose Garden tariff chart. They’ll have to be broad-brush trade pacts, essentially the first terms of a longer negotiation. It’s hard to imagine that thorny issues like the appropriate trading range for foreign-exchange rates for the rupee, yen, won and NT$ will have concrete terms.

Past U.S. trade deals have taken 18 months to negotiate and 45 months to implement, according to Torsten Slok, the chief economist at Apollo Global Management. And they’ve typically had zero success in nailing down currency rates. Far more likely is that, akin to the language used after the initial Taiwan negotiations, we will get diplomatic language that central banks agree to avoid “manipulation” of their currency.

Manipulation hard to define

How you define manipulation is up for grabs? The Fed “manipulates” the U.S. dollar when it changes the exchange rate, making it more or less attractive to hold the currency.

In Hong Kong, the equivalent of the central bank is having to buy the U.S. dollar to offset weakness in the currency that threatens to push the Hong Kong dollar out of its pegged trading band. Since the Asian financial crisis, the Hong Kong dollar has been pegged between HK$7.75 and HK$7.85 to the U.S. dollar.

The Hong Kong Monetary Authority says it bought a record $7.8 billion (in U.S. dollars) today to weaken the Hong Kong dollar, and has been intervening repeatedly since May 2 after it bumped up against the HK$7.75 limit to its strength. The first move to buy U.S. dollars in five years is an about change for the HKMA, which was forced to do the opposite and sell U.S. dollars in 2022 and 2023 to offset U.S. dollar strength.

We also need to watch the Malaysian ringgit, up 6.8% since the start of the tariff tantrum, making it the next-largest Asian currency gainer behind Taiwan. Malaysian officials say the volatility remains “within the band where it’s not serious,” in the words of trade and industry minister Tengku Zafrul Aziz.

Japan and China will also experience pressure to appreciate their currencies, and are home to institutions that hold large amounts of U.S. treasuries. The Chinese yuan is up only 1.9% since the Rose Garden event kicked off the U.S.-China trade war, but both Beijing and Tokyo have been cited as currency manipulators in the past, artificially keeping their currencies low to boost exports.

There’s a host of currencies such as the ringgit, Singapore dollar and the Chinese yuan that do not trade freely at all, and are managed in a careful band against the U.S. dollar. While I don’t expect Asian central bankers to cease FX management, and let the currencies go, they are now under hefty pressure to allow them to strengthen. 

At the time of publication, Frew McMillan had no position in any security mentioned.